2018 is shaping up to be a humdinger for banking stocks. The US economy is in full swing, and there is evidence of this across the spectrum. Consider the following economic indicators:
- The Unemployment Rate is just 4.1%
- The Inflation Rate is at a healthy level of 2.1%
- The Interest Rate is steadily increasing and is currently at 1.5%
- The Gross Domestic Product Growth Rate was last measured at 3.2%
The aforementioned numbers may not mean much to a casual trader or investor, but they present favourably for an economy on the mend. Evidence of the strength of the US economy can be found in the current levels of major bourses:
- The Dow Jones Industrial Average has a 1-year performance of 29.76% and is currently at 25,803.19 points
- The S&P 500 Index has a 1-year performance of 22.49% and is currently at 2,786.24 points
- The NASDAQ Composite Index has a 1-year performance of 30.26% and is currently at 7,261.06 points
There are several reasons to get excited about the current year, according to Wilkins Finance trading expert Montgomery Hamish Bellwether, “2017 ended on a high note, and it was a December to Remember for traders and investors across the spectrum. For the Trump administration, a year of negative press could not undo the passage of an historic tax reform bill. Tax legislation is a massive accomplishment for any administration. The Democrats fought hard to prevent Republicans from modifying existing regulations, but they failed. The result, we believe, is going to prove beneficial to US corporations, and the taxpayer over the long-term. Among the many notable changes are a reduction in the corporate tax rate from the current levels of 35% + to a maximum of 21%.
While most corporations in the US do not pay such extraordinary taxes, legislation now caps corporate taxes at a maximum amount. This will allow US companies to enjoy higher profitability, have a greater amount of disposable income to put back into reinvestment initiatives, share buybacks, dividends, higher salaries, and growth potential. We are confident that big banks like Bank of America, Wells Fargo & Company, Citibank, Morgan Stanley, Goldman Sachs, J.P. Morgan and others will use this opportunity to do good domestically.”
What Else is Shaping the Economy?
There are several other factors driving up the price of bank stocks in 2018. These include an unprecedented deregulation movement by the Trump administration. Trump wants to remove 2 types of legislation for every additional legislation that is passed. In fact, his administration has been so successful at decluttering the massive bureaucracy that is Washington DC, that Trump himself announced some 20+ legislations had been removed for every 1 new legislation passed. This is unprecedented in US economic and political circles. Plus, Trump and team are seeking to put an end to the Dodd Frank legislations of 2007/2008 that were put in place to prevent banks from lending more to build the economy. Banks were required to have a capital cushion in place in the event of another economic downturn.
Bank Stocks Are Going to Boom in 2018
However, the US economy has improved significantly to the point where it is no longer necessary for such security protocols to be in place. Greater liberalization of lending laws and requirements needs to be included in the current economic environment to permit GDP growth. Bank stocks are particularly susceptible to these changes taking place. Nowhere is this more evident than major banking giants like Bank of America (BAC) which is currently trading at $31.19 per share up from $29.70 per share at the start of the year. The 1-year performance of BAC is even more impressive, since it spiked from $22.05 to its current level. Stocks like Wells Fargo and Company have also enjoyed a dramatic uptick in prices in the past 1-year.
Back in January 2017, WFC stock was trading at $54.27 per share, and now it is $62.55 per share. Increasing interest rates are the third reason why leading authorities believe that bank stocks are going to boom in 2018. The current interest rate (Federal Funds Rate) according to the CME Group FedWatch tool is in the region of 1.25% – 1.50%, and is expected to remain in that range on 31 January 2018 when the Fed FOMC (Federal Open Market Committee) meets for the first time in 2018. However, expectations of a rate hike on 21 March 2018 are largely bullish at 72.6%, when it is expected that the Federal Funds Rate will rise in the region of 1.50% – 1.75%. By 19 December 2018, there are expectations of a rate hike in the region of 1.75% – 2.50% at current probabilities. All of this means one thing: bank stocks are going to boom this year, and barring a dramatic economic contraction, traders will do well to cash in early.